I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

What Michael Kinsley Gets Wrong About Taxation

Much of what he says here is both true and important. But I’m afraid there’s something of a gap in his argument. Yes, absolutely, it’s true that whatever we tax we’ll get less of. And we don’t want to tax work just as we don’t want to tax investment. But it’s also true that we’ve got to tax something because there really are things that both must be done and which can only be done by government.

So we’re going to have to tax something or other that we don’t want to tax.

Unfortunately, this is true of every method of taxing capital, just as any tax on labor reduces everybody’s incentive to get up in the morning and go to work. When you tax something, you discourage whatever it is you’re taxing. That is the tragic nature of taxation.

But you have to tax something if you want to spend on something else.

Entirely so. Just as this is also true:

My favorite economist, Henry George (1839-1897), wanted a tax on the ownership of land, because — unlike almost any other good in our economy — you can’t make more of it, and you can’t make less of it. If you own some, you’re at the mercy of the tax collector, and have nowhere to hide.

Although not entirely true. George wanted to tax the rental value of unimproved land, as that was the least distortionary tax possible. I also think it’s a great idea: although what really makes it appeal to me is that George went on to say that as this is the only non-distortionary tax then it should be the only tax. And as you cannot get more than about 15% of GDP out of this tax then that would just mean that government (of all levels, added together) would need to shrink to 15% of GDP. Which I also think is a great idea.

However, the part that Kinsley gets wrong:

Anyway, what’s so terrible about “double taxation”? There are two economic decisions going on: work versus sloth, and saving versus spending. True, you want to encourage work and saving, while discouraging sloth and spending. Just as true: You must tax something. So it makes sense, or so it seems to me, to tax all of these activities equally at the lowest responsible rate.

No, unfortunately, that’s not true. For we do not have just the one tax, on rental value of land, which is undistortionary then all other taxes are distortionary to the same degree. What we actually have is a spectrum of taxes, from the least distortionary to the most. You can see the OECD estimates of the relative distortions here.

Land taxation is, as we know, the least distortionary. Then, with more, comes consumption taxes: things like a sales tax or a VAT. Then, more distortionary again, are taxes on incomes (this includes both income taxes and FICA). Then, again yet more distortionary are taxes on capital and corporations.

So, if we are to try and reduce the distortions from the tax code we want to move from the latter part of the spectrum to the earlier. To have lower tax on corporations and capital than taxes on income. Even better, to lower all three and increase taxes on consumption.

In effect, Kinsley’s argument is perfect: until his conclusion. For the reality is that in order to reduce distortions we want to have lower taxes on capital than we do on incomes. Best of all would be no taxes on corporations, capital, incomes or consumption. Just land value taxes and, if you insist, a few sin and Pigou taxes. In which case we’d just have to have a lot less government and a lot fewer politicians: and that would be a real shame, wouldn’t it?

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